the error message "Target processor is not selected" is a bug of the wizard if you select a non-SDK project with Processor Expert, and if you select a board (e.g. FRDM-KL25Z) instead of the microcontroller (KL25Z128M). This should have been fixed with an update, or simple create the project with the microcontroller on it selected, instead of the board name.

yes, indeed, I have that patch installed too, but still have that issue. I thought it had been fixed, but it looks I was wrong about that.

The difference between the 'microcontroller' or the 'board' version: in the board version the pin muxing in the PinSettings component of the project is already set up to wire up the components of the board (e.g. LED, etc). So the pins already have the correct names. Apart of that, no difference.